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The Mexican peso has emerged as an unlikely winner from Donald Trump’s trade war, as fading global risks and repeated delays to US tariffs lure investors back to the country’s high-yielding assets.
The currency was one of the big, early victims of Trump’s trade assault, weakening to as many as 21 pesos to the US dollar in frenzied trading in early February after the announcement of 25 per cent US tariffs on Mexico that were then delayed.
It has since rallied to just over 18.5 to the greenback, more than erasing its losses since Trump’s election, as investors take advantage of a lull in market volatility and positive trade developments to pile into high-yielding Mexican assets. The peso has risen 4 per cent over the past three months, making it the best-performing of a basket of highly traded currencies tracked by Bloomberg.
“Mexico is perceived to have managed the US relationship negotiations a bit better than others,” said Derek Halpenny, head of global markets research at banking group MUFG.
Mexico and Canada have better trade terms with the US than most other countries thanks to an exemption for goods that comply with the US-Mexico-Canada trade deal USMCA, meaning the vast majority of their exports enter the US free of tariffs. On July 31, Mexico secured a 90-day extension to Trump’s so-called reciprocal tariffs for non-exempt goods, while Canada did not. The Canadian dollar has gained just 1.1 per cent over the past three months.
The surge in the peso and in other currencies such as the Brazilian real, up 3.7 per cent in the past three months, has been fuelled by a revival of the so-called carry trade, in which investors borrow where interest rates are comparatively low to buy assets where rates are higher.
Mexican assets, underpinned by a central bank policy rate of 7.75 per cent, are a key beneficiary.
“The strength of the Mexican peso and Mexican assets in general is mostly driven by the weak dollar environment and high carry,” said Thierry Larose, emerging market debt manager at Vontobel, an investment group. In Brazil, the real has similarly shrugged off fiscal problems and US trade tensions, he added.
Currency analysts said a fall in volatility had revived the carry trade. A CME Group index of expected swings in the dollar-peso exchange rate has fallen steeply from its peak in November and last month touched its lowest levels since May last year, a fall in implied volatility also seen across other currency pairs.
“The carry trade has been very popular since volatility levels started to settle,” said Chris Turner, global head of markets research at bank ING.
Fund managers said Mexico was benefiting from a flood of capital back into emerging markets, which has helped to drive the premium that developing countries pay to borrow above the yield on developed-country bonds to its lowest since 2007.
Ten-year Mexican debt has rallied since the start of the year, pushing its yield down to 9 per cent, compared with 4.3 per cent on comparable US Treasuries.
Viktor Szabo, a fund manager at Aberdeen, said a mixture of sluggish growth and “well behaved” core inflation had boosted Mexican debt, which is also benefiting from the “very strong tailwind” of dollar weakness.
“US trade policy remains a source of risk near term,” he added. “But concerns are somewhat mitigated by Trump’s frequent U-turns on the most damaging policies.”
President Claudia Sheinbaum’s government has been in talks over a new security pact with the Trump administration to try to weaken Mexico’s violent drug cartels. But a host of risks including the threat of unilateral military intervention by the US hang over the bilateral relationship.
Vontobel is slightly underweight Mexican assets in a belief that markets are underrating some of the more intractable problems facing Sheinbaum’s government, such as the debts of Pemex, the state oil company, Larose argued. But on US tariffs in particular, given widespread exemptions, “the threats are probably a bit overstated”, he said.